* US stocks reverse gains; retailers fall on yuan concerns
* Commodities pare gains over yuan's uncertainty
* U.S. dollar rises broadly as risk-currency rally fades
By Manuela Badawy
NEW YORK, June 21 (Reuters) - U.S. stocks fell and metals and oil prices pared gains on Monday on uncertainty over how much the China would let the yuan rise after it vowed to allow a more flexible exchange rate .
China's move over the weekend initially ignited a wave of euphoria across financial markets on optimism that a stronger yuan would lift China's purchasing power for foreign goods such as commodities, a boon to the global economy given China's huge demand for raw materials.
Spot yuan <CNY=CFXS> climbed to its highest level against the dollar since its last revaluation in July 2005 in a clear signal that Beijing was sticking to its word that it would allow greater currency flexibility. For details, see []
But as trading progressed, markets gave back much of their gains on worries that China may do little to its currency that could be meaningful for the global economic recovery in the short term.
The U.S. dollar rose late in the day as investors took profits from a risk-currency rally, while the Australian and New Zealand dollars, considered part of the commodity bloc, paired gains as the yuan-induced euphoria faded.
Copper and oil prices, which surged on expectations of increased appetite for natural resources in the world's third-largest economy, gave back about half their earlier gains.
"It's basically inertia where the moves are not progressing and people have turned around and took it the other way. I would say the lack of follow-through after the China-fueled rally is leading to some risk aversion," said Brian Dolan, currency strategist at Forex.com in Bedminster, New Jersey.
"I think people are concluding that the China news would be a minor thing primarily for diplomatic window-dressing. China is doing this ahead of the G20 meeting primarily to defuse the situation there and hope that the G20 talks about other things."
Easing the currency peg is a move to allow China's economy to be driven less by the export of goods abroad and more by domestic consumer spending. The move came ahead of a meeting next week of the Group of 20 leading industrialized and developing economies, where global trade imbalances are expected to be a key issue.
U.S. stocks ended lower, reversing gains that earlier had driven the three major indexes up by more than 1 percent.
The Dow Jones industrial average <> closed down 8.23 points, or 0.08 percent, at 10,442.41. The Standard & Poor's 500 Index <.SPX> fell 4.31 points, or 0.39 percent, at 1,113.20. The Nasdaq Composite Index <> dropped 20.71 points, or 0.90 percent, at 2,289.09.
"The announcement was considered to be constructive, but markets were unable to sustain that euphoria as they looked at the details," said John Brady, senior vice president at MF Global in Chicago.
Mining and energy shares shed most of their early steep gains. Caterpillar Inc <CAT.N> which had gained as much as 2.6 percent, ended up just 0.2 percent at $66.07. Freeport-McMoRan Copper & Gold Inc <FCX.N> which jumped 6 percent, closed up 2.18 percent to $68.08. For a factbox []
Retailers took a pounding on expectations that flexibility in the yuan would lead to higher costs on imports from China. Dow component Wal-Mart Stores Inc <WMT.N> fell 1 percent to $51.02. The S&P retail index <.RLX> shed 1.7 percent.
"It seems everything in the low-cost retailers is made in China," said Brian Gendreau, market strategist affiliated with Financial Network Investment Corporation in El Segundo, California.
The MSCI world equity index <.MIWD00000PUS> rose 1.6 percent, while the FTSEurofirst 300 index <> rose for a ninth straight session to close 1 percent higher at 1,055.38 points, the highest close since early May, with basic resources stocks the biggest gainers.
Emerging stocks <.MSCIEF> added 2.4 percent to a six-week high, while emerging sovereign debt spreads <11EMJ> tightened 8 basis points to 303 bps, their narrowest in five weeks.
U.S. crude oil <CLc1> ended up 0.83 percent at $77.82 a barrel, while spot gold <XAU=> fell nearly 2 percent, its biggest one-day drop in more than a month after a sudden decline of the euro prompted investors to take profits from all-time highs set earlier.
China is the world's second biggest energy consumer after the United States.
Copper prices gave back some of its earlier gains as China, the world's largest consumer of industrial metals, may do little to its currency of meaningful effect in the short-term.
"That's why people are a bit cautious," said Wayne Atwell, managing director at New York-based investment bank Casimir Capital LP. "If it's 10 percent, then it's a different story altogether."
Benchmark lead <CMPB3> on the London Metal Exchange touched $1,837.75 a tonne, its highest since May 28, before closing at $1,833, up $88. Tin <CMSN3> reached $18,250, matching a high on May 28, before closing at $17,800/17,900 from $17,450. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Full yuan coverage []
Unlocking the yuan http://china.thomsonreuters.com/yuan/
Graphic on yuan movements http://r.reuters.com/sut87k
Insider TV
-- Yuan to rise before G20 http://link.reuters.com/jes92m
-- Yuan NDFs overshoot http://link.reuters.com/jup72m ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
The single European currency initially extended last week's recovery against the dollar, at one point rising to a one-month high, but gains faded as the New York session got under way.
The euro was last down 0.52 percent at $1.2320 <EUR=>. The dollar rose against a basket of major trading-partner currencies, with the U.S. Dollar Index <.DXY> up 0.30 percent at 85.953.
The benchmark 10-year U.S. Treasury note <US10YT=RR> was down 6/32, with the yield at 3.2469 percent. The 2-year U.S. Treasury note <US2YT=RR> was down 1/32, with the yield at 0.7175 percent. The 30-year U.S. Treasury bond <US30YT=RR> was down 10/32, with the yield at 4.1653 percent.
Breaking the peg might mean China needs to buy less U.S. dollars in intervention, which would leave it with fewer dollars to buy U.S. Treasuries, but also give it less need to diversify its holdings into currencies like the euro. (Additional reporting by Gertrude Chavez-Dreyfuss, Ryan Vlastelica, Barani Krishnan and Frank Tang in New York; Editing by Leslie Adler)
